His name is Peter Warren Finlay. But to his friends, and his many creditors, the mysterious and eccentric first-time novelist, a favourite to win the Man Booker Prize next week, will always be Dirty Pierre.

Now we know why. In an extraordinary series of confessions to the Guardian, Finlay has admitted to selling his best friend's home and running away with the money to feed his cocaine and gambling addictions. He has also "put his hand up" to fleeing debts of "hundreds of thousands of dollars" racked up in Australia and Mexico trying to make a film about his search for the mythic gold of the last Aztec emperor, Montezuma, in an attempt, he claims, to pay back his hapless friend.

"I am not proud of what I have done, of all the women I've lost, and all the good people who trusted me and were burned. I have lived in dread of this for 15 years - that one day someone like you would come along," he said yesterday. "Living with it has been like waking up every morning to find that you have shit the bed. In a way, I'm relieved it's finally come out."

Finlay, 42, claims to have been weighed down with guilt and remorse and to have spent the last 10 years as a virtual recluse "retuning my head with Russian symphonic music... I had to repolarise and deconstruct myself". Those feelings of regret went into the writing of his award-winning Rabelaisian black comedy Vernon God Little, about a Texan teenager who pointlessly lies himself into a corner and ends up on trial for his life after a media witch-hunt.

With redemption in mind, Finlay wrote the novel under the pseudonym of DBC Pierre - "Dirty But Clean" Pierre. It was meant as a symbolic statement that this was a "new start" after years spent in a "pit of deceit and failure", as an unsuccessful film-maker, gambler, graphic artist and sometime smuggler.

"I let some very fine people who believed in me down," Finlay said. "I thought that if the book worked I could start to quietly pay some of them back."

But as the acclaim for his novel grew, and the prizes and nominations for the likes of the Booker and the Guardian First Book Award rolled in, Finlay's fears multiplied that the day would come when he was found out and unmasked.

That moment came a little over a fortnight ago when his principal victim opened the Guardian Weekly at his home in Philadelphia and saw that the charismatic young man who 16 years before had left him with nothing, and broke his stepdaughter's heart, had reinvented himself again, this time as a novelist.

And in a twist worthy of Victor Hugo's humanist masterpiece Les Misérables, the man who has suffered most at Finlay's hands - losing even his health - wants to forgive him despite the protestations of his indignant family.

Robert Lenton, an elderly American artist, who met Finlay in the Spanish city of Granada in the mid-1980s, saw himself as a father figure to the young Australian. Finlay was the son of a wealthy scientist who moved his family to Mexico City. But he went off the rails after his father died of a brain tumour when he was 19. He spent part of his recovery from injuries he sustained in a car crash - after which surgeons had to reconstruct his face - at his mother's apartment in Granada.

Lenton, now 75, was by his own admission "quite naive... I know it sounds foolish, but Peter was my best friend when I was in Spain. I trusted him. It was a bad thing, but now I want to forgive him. My family are not too happy about this but my philosophy is that holding grudges does nothing for you".

The painter was left penniless and homeless after his family claimed Finlay conned him into signing his apartment over to him. Mr Lenton said he was duped into signing a document in Spanish - which he couldn't read - confirming that he had been paid in full for the flat. Finlay denies he set out to cheat his friend but admits selling the flat without telling Mr Lenton and defaulting on the $46,000 (£28,750) he was supposed to pay him.

"There are some inaccuracies in what the family are saying, to my mind, though I have to admit I was burned out of my head on drugs at the time. In the final analysis, I hurt the man and I did take his place."

The writer has now agreed to pay Mr Lenton $70,000 in compensation. "The day I decided to work my heart into this book," he told the Guardian, "I decided that I wanted to pay up my past no matter what it cost me. Then and only then will I be able to shed this weight that has been crushing me... I have had no peace, no rest. It's been an nightmarish odyssey of Homerian proportions. Now I want to put things right."

Last night, the $5,000 first instalment he agreed to send to Mr Lenton nine days ago had yet to arrive, although Finlay insists it was sent by courier on Monday. Nevertheless, Mr Lenton - who, as Finlay readily admits, "must be pretty sick of my 'cheque's in the post' excuse by now" - believes the money will materialise "because I believe Peter's remorse is genuine".

Mr Lenton's son, Andrew, is unconvinced. "He did my father and this family a terrible wrong. He is a fantasist and a charmer. Until he repays every cent I won't believe a word. My father is bent on forgiving him. It's his way of coping, I suppose. I just hope it's not another scam."